MTD for VAT: the digital links requirement explained in plain English

MTD for VAT: the digital links requirement explained in plain English


 

MTD is about the journey, not just the filing

Most businesses understand the headline of Making Tax Digital for VAT: returns must be filed through compatible software, not typed into the old HMRC portal. Fewer understand the stricter rule underneath. HMRC requires the figures to travel digitally all the way from the source records to the submitted return, with no manual retyping or copy-and-paste in between. That end-to-end chain is the digital links requirement, and it is where most MTD non-compliance quietly happens.

What counts as a digital link

A digital link is any transfer of data between software where the numbers move without human re-keying. HMRC accepts a practical list of methods:

  • Linked cells in spreadsheets, where one cell pulls its value from another by formula.
  • Importing and exporting data files such as CSV or XML between programs.
  • API transfers between applications, which is what happens inside most cloud accounting packages automatically.
  • Emailing a spreadsheet whose cells are digitally linked, or using macros to move data between systems.

The key test is simple: if a person retyped the number or copied and pasted it, the link is broken. If the number flowed through a formula, an import or an integration, the link holds.

The spreadsheet question, answered

Spreadsheets are fully allowed under MTD, which surprises businesses that assumed they had to abandon Excel. What matters is how the data moves. A common compliant setup is a spreadsheet that calculates the VAT return figures with formulas, digitally linked to the transaction records, and then passed to HMRC through bridging software. Bridging software takes the spreadsheet's figures and submits them through HMRC's API without anyone retyping them.

What does not work is the old routine of totalling columns by eye and typing the box figures into software, or copying values from one spreadsheet and pasting them into another. Both break the digital chain at exactly the point HMRC cares about.

What breaks the chain in real businesses

In practice, the breaks happen at handoffs between people and systems. The bookkeeper emails a PDF summary and someone retypes it. Two departments keep separate spreadsheets and reconcile them with copy-paste. A director keeps a side spreadsheet for adjustments and types the totals into the return. Each of these feels harmless and each fails the digital links test. The soft landing period that once tolerated these habits ended in April 2021, and HMRC's compliance checks now specifically ask how figures moved between systems.

Adjustments deserve special attention. Error corrections, partial exemption calculations and fuel scale charges often live outside the main accounting system. If those adjustments are calculated in a spreadsheet and typed into the return, the chain is broken. Link the adjustment spreadsheet to the return preparation with formulas or imports, and keep the workings so the path can be demonstrated.

Penalties and HMRC's approach

MTD record-keeping failures sit alongside the wider VAT penalty regime. Late filing now falls under the points-based penalty system introduced in January 2023, where repeated lateness accumulates points towards financial penalties. Separately, HMRC can issue penalties for failing to keep digital records and maintain digital links. In practice HMRC often starts with nudge letters asking businesses to explain their processes, which is a far cheaper moment to fix the chain than after a formal assessment.

A practical compliance checklist

  1. Map the journey. Write down every step each VAT figure takes, from invoice or receipt to the submitted return.
  2. Mark each transfer as digital or manual. Be honest about the copy-paste steps.
  3. Fix the manual steps with formulas, imports or integrations, or consolidate onto one system.
  4. Check adjustments and corrections specifically, since these are the most common break points.
  5. Keep evidence: the linked spreadsheets, the bridging software logs, and a short note describing the process.

Most businesses find the fix takes an afternoon once the map is drawn. The expensive version is discovering the break during an HMRC visit. If VAT compliance is eating more time than it should, specialist support pays for itself quickly. Finex Outsourcing is a Global Business Services provider whose VAT outsourcing services cover MTD-ready record-keeping, digital links reviews and return preparation. HMRC's guidance on keeping VAT records digitally is at gov.uk.


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